Niclas Meyer
Niclas Meyer is an assistant professor at Hanken School of Economics. He has a background in financial economics and mathematics, and holds a doctoral degree in finance from Hanken.
Location Finland
Activity
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Niclas Meyer replied to Amar Shami
Hi @AmarShami, just a quick clarification: very few (maybe some options) assets are uncorrelated with market risk (systematic risk). The point with diversification is to build a portfolio where the non-systematic (idiosyncratic) risk is reduced or eliminated, i.e., the risk that is related to some characteristic of the asset/company itself, the industry, etc....
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Hi @MaureenJerusalem, it is true that all investing involves some risk. However, what is specifically meant with the "risk-free rate" is that it is the baseline (safest investment) against which other investments need to be compared. If we are talking about investments in US dollars, the "risk-free rate" is the rate on US short-term Treasury bonds as the risk...
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Hi @JuhoIivanainen, although not a direct disadvantage/drawback, it needs to be pointed out that when you invest in an index fund you can expect to earn the return of the underlying index (e.g., the S&P 500 index) and nothing above that (or less for that matter, unless you for some reason pay substantial fees for your index fund). That is, you should not...
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Hi @LesleyBarendse, stocks are, all else equal, more risky than bonds because equity holders (shareholders) have the residual claim on a company's earnings while debtholders get paid before shareholders. But stocks also have a higher potential upside compared to bonds because if a company generates a lot of profits in excess of what they need to pay their...
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Niclas Meyer replied to Bernard Pereira
Here we of course use simplified examples to illustrate how bonds are priced but it is in fact rather simple to calculate the prixe of a zero-coupon short-term Treasury bond as the payments of these assets are stated beforehand (you know when you receive the cash flows) and they paid out with a high degree of certainty. That is why bonds are called fixed...
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Niclas Meyer replied to Otto Taimi
As Albert Einstein allegedly stated: "compound interest is the most powerful force in the universe"
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Hi @GideonKaruguru, stocks in a company are riskier than e.g., bonds because stocks are the residual claim on a company's earnings. That is, bondholders get paid before shareholders (also in the case of bankruptcy) and that is why holding a company's stock is more risky than holding a company's bond, all else equal. But that is also why stocks provide more...
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Niclas Meyer replied to A Tuck
Hi @ATuck, this is an important question and one that finance academia is focusing increasingly on. Relating to your comment on Blackrock, there is actually a forthcoming paper by Azar, Duro, Kadach, and Ormazabal in Journal of Financial Economics (a top finance journal) that reports that the Big Three (BlackRock, Vanguard, and State Street) mostly engage with...
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Hi @JuhoIivanainen, it certainly is rather low in historical standards. But if we assume that the equity risk premium (excess return of stocks over risk-free rate) is around 5%, and we observe that the risk-free rate at the moment is around 0-1% (and even negative in some countries), then a 5%/year expected return might seem reasonable.
If the risk-free...
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Hi @BrettWright, ETFs can also invest in the underlying assets, and many do. For example, the Vanguard S&P 500 ETF invests in stocks belonging to the S&P 500 index.
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Hi @JuhoIivanainen, I am not actually sure if anybody issues perpetual bonds nowadays but a classic example of perpetual bonds are "consols" (issued by UK and US governments). In his book, Goetzmann (2017) mentions also perpetual loans/bonds such as the Venetian prestiti, the Water Board of Lecdijk Bovendams' perpetual bond, perpetual rents (arranged by the...
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Niclas Meyer replied to REBECCA OLUWATOSIN
Hi @REBECCAOLUWATOSIN, great to hear that you're learning. One way to think about gold is as a type of a currency (although it of course has other uses as well), which cannot, at least not easily, be inflated away. If you want to learn more, in the video in section 1.11., Björn gives his very interesting thoughts on gold.
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Niclas Meyer replied to Nicola James
@NicolaJames Diversification is an essential part of this course, and we will learn more about it as the course progresses.
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Niclas Meyer replied to Anne T
Hi @AnneT, as far as I know of (and I could be wrong) finance is not widely taught in schools in Finland, although there might be some schools that do. In some sense this is a shame as the basic concepts in finance (such as compound interest/compounding, what a stock/bond is, etc.) could in my opinion easily be taught in e.g. Mathematics classes.
I am not...
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Niclas Meyer replied to Mary Bradley
Hi @MaryBradley, note that this is a very simplified "definition" of an investor. But to some degree it is true: if you have capital but no business ideas, and your friend has a promising business idea but no capital, you might both be better off if you give your money to your friend to start the business (given that you believe that the firm has a good chance...
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Niclas Meyer replied to John C.
Hi @JohnC., there are index ETFs for European markets which have extremely low costs, around 0.07-0.10% per year. So this would be the benchmark.
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Hi @EllyYazdi, you can calculate the correlation using historical returns for the two stocks. When you have downloaded data on historical returns, it is relatively simple to calculate the correlation using for example a statistical software like R (it is free), or Excel. I am sure that there are also some internet pages which show correlations for well-known...
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Niclas Meyer replied to Ken Bladwell
Hi @KenBladwell, the explanation by @OmarAzmi is correct. If you choose a portfolio on the orange line, you will choose a portfolio which has a lower expected return but which has the same risk as one that lies straight above on the blue line (draw a vertical line) and which has a higher expected return.
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Niclas Meyer replied to Javi I
Hi @JaviI, r_E, or the "equity cost of capital", is basically the expected return we require for investing in a specific stock. This expected return should equal the return on other investments available in the market (which you forgo when investing in a specific stock) which have the the same risk (!) as the stock you invest in.
A practical way of...
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Niclas Meyer replied to Omar Azmi
Hi @OmarAzmi, you're right, this is a typo. Thanks for pointing it out and it should now be correct!
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Hi @GeoffClarke, I guess the period following the Great Depression is the most analogous to today's situation in the economy, at least if we talk about the situation in U.S., Europe, Canada, etc. For example, the U.S. gross federal debt as % of GDP was actually higher following WWII than it is today (https://fred.stlouisfed.org/series/GFDGDPA188S). Also, the...
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Hi @CatharinaCandolin, we (Jan and me) added a list of books which we find interesting and helpful at the end of step 7.15. We will update the list whenever we come up with new books.
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Niclas Meyer replied to Larissa Pietri
Hi @LarissaPietri, if I read your question correctly, you are asking about the "opportunity cost of capital". That is, when you make an investment, you're effectively forgoing investing in other investments. If these other investments have the exact same risk and term as your investment, the best return for any of these other investments would be your...
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Niclas Meyer replied to Larissa Pietri
Hi @LarissaPietri, the CAPM is often used to calculate the expected return for stocks. As the beta is used in the CAPM to attain the expected return of a stock (given its systematic risk), and the beta is calculated using historical data, the expected return is based on historical data.
We could in principle also use the historical average (e.g., yearly)...
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Niclas Meyer replied to Minna N
Hi @MinnaN, Referring to your question about potential credits for the course, Hanken aims to offer this course via its Open University starting at the latest in the autumn of 2021. Then it will be possible to attain formal credits, most likely 2 ECTS. However, you will need to pass the final test in FutureLearn and an additional extra test at Hanken to get...
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Niclas Meyer replied to Robert Richards
Hi @RobertRichards, I agree with the notion that learning should be a continuous process. I think Warren Buffett also says something like this, that you should strive to learn new things throughout life, for example, by reading books.
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Thanks @JuhaHyyryläinen, nice to hear that you enjoyed the course and found it useful.
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Hi @GodfreySampson, the prolonged situation with extremely low or even negative interest rates around the world is certainly a kind of "unseen territory" (or conundrum as Björn puts it) in economics for which we necessarily do not know the outcome to. But the situation is certainly being analyzed and studied extensively.
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Niclas Meyer replied to Melissa Y
Hi @MelissaY, when reading Bernanke's (2013) and Geithner's books (2014), you get the sense that they really tried to save Lehman from collapsing as they deemed it to most likely be a "too big to fail" bank, but they simply couldn't do it. The bank was insolvent, it did not have good collateral against which the Fed could lend it money, and there were no...
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Hi @DeirdreME, the central bank will demand good collateral to make out loans to troubled institutions. Bernanke (2013) points out that during the financial crisis the Fed could only lend money against good collateral, and when an institution was deemed (temporarily) illiquid but solvent (in contrast to being insolvent).
If a company or institution did not...
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Hi @HeleneHanninen, since Berkshire Hathaway mostly invests in stocks and stocks tend to be volatile, they have certainly had some loss years also. But on average, the company (Buffett and Munger) has been extremely successful with an compounded annual return of roughly 20% per year for the past 55 years.
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Niclas Meyer replied to Matteo Imperato
Hi @MatteoImperatom, thanks for your suggestion. We will consider adding more exercises to the next run.
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Niclas Meyer replied to Eero Kaipiainen
Hi @EeroKaipiainen, Chapter 8 in "Intelligent Investor" is in my opinion worth reading and can help one to think about how to respond (or not to respond) to fluctuations in markets.
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Hi @WendellGMeusa, note that the expected return on the balanced portfolio depends on the "risk-free rate". If the risk-free rate is 0%, a balanced portfolio yielding 5% is an okay return. But if the risk-free rate was 15% (like it was in the 1980s in many countries in the world), a 5% return for a balanced portfolio would be very poor.
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Hi @ÁlvaroContreras, I think REITs (Real Estate Investment Trusts) could be included in this section to the next run of the course, or possibly to the "Asset Classes" section where we discuss real estate.
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Niclas Meyer replied to Yijun Wang
Hi @YijunWang, yes, central banks around the world have lowered interest rates again in response to the recession caused by the corona pandemic. But since, for example, the Fed (the U.S. central bank) hit zero interest rates (the European Central Bank was already at negative interest rate levels), the Fed "printed more money" and there was also coordinated...
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Niclas Meyer replied to Patrick Fordell
@PatrickFordell No, unfortunately I am not familiar with this book.
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Niclas Meyer replied to Patrick Fordell
Hi @PatrickFordell, where exactly did you find information on the "Federal Reserve Bank being established in 1929"?
According to Fed's homepage, the central bank (the Federal Reserve System) was established on December 23rd, 1913. As part of the Federal Reserve System, there are "12 regional Federal Reserve Banks", one for each geographical district...
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Niclas Meyer replied to Justin Savage
Hi @JustinSavage, it is true that "always" is a strong word and we cannot be 100% sure that the future will look the same as the past. However, the US stock market for instance has "always" recovered in the past 120 years even though there have been world wars, the Great Depression, influenza pandemics, etc. In my view, it is unlikely that this will not be the...
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Niclas Meyer replied to Tero N
@DesmondCarbery Hi Desmond, you are right in the sense that the expected return on the portfolio depends on the expected returns of the assets you include in your portfolio.
If your own 50% of stock A and 50% of stock B, and stock A has an expected return of 10% per year and stock B has an expected return of 5% per year, your portfolio's expected return...
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Niclas Meyer replied to Paula Linna
@PaulaLinna To continue on this, some of the things I think has made Buffett so successful is that (1) he has been able to find companies which he is relatively sure about their future prospects (for instance, they have a competitive advantage so they will stay market leaders, their future cash flows are somewhat predictable, etc.). (2) He has bought stocks of...
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Niclas Meyer replied to Paula Linna
Hi @PaulaLinna, I am not sure I can give you a good answer to this question. Some financial economists would argue that the market is always efficient (for instance, you can only observe crashes in hindsight, etc.) while others argue that markets are not always efficient (I am not sure how these economists state that you are able to detect when, and when not,...
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Hi @rukaiyajika, in general, stocks of large companies in the same country tend to be somewhat highly correlated. Most often, they are more correlated if the companies operate in the same industry, and less so if they do not (there are of course exceptions to this). So, in that sense, it could be motivated to diversify by investing in stocks in different...
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Niclas Meyer replied to Amar Shami
Hi @AmarShami, just to specify, stocks have higher expected (!) returns than bonds (this is called the equity risk premium and is viewed as a compensation to investors for investing in the more riskier stocks than in bonds). However, the returns on stocks may be lower than the returns on bonds when measured over a "short" period of time (e.g., 1, 5, or 10...
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Niclas Meyer replied to Robert Richards
Hi @YijunWang, just a quick look at some monthly data for total stock returns (including dividends) for Google, Apple, and Amazon between 2015m1 - 2019m12 suggest that the correlation between Google's and Apple's stocks was roughly 0.40 (relatively high); the correlation between Google's and Amazon's stocks was roughly 0.65 (high); and the correlation between...
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Hi @TimoHolmström, in his book "Stress test", Timothy Geithner discusses the pros vs cons of central banks providing liquidity and "bailing out" systemically important institutions during crises.
Cons include moral hazard - that is, by saving e.g. banks you may create incentives for them to take on more, not less, risk in the future (as they anticipate...
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Niclas Meyer replied to Markus Lindqvist
Hi @MarkusLindqvist, basically, if your deposits "earn" zero interest and you pay a monthly usage fee for an account, I guess this could be viewed as a sort of "negative interest rate" as you pay money to store money at the bank.
On the other hand, I guess that you could also view them simply as a compensation for the services the bank provides you with...
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Niclas Meyer replied to Jouko Ruotsalainen
Hi @JoukoRuotsalainen, thanks for pointing this out. The PDF file is now correct.
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Niclas Meyer replied to Victor Noguera
Hi @VictorNoguera, I agree with the notion that the low bond yields in the current environment poses some new problems when constructing a portfolio. Also, the fact that they may not serve as a kind of "insurance" in recessions may be an issue. Traditionally, when the economy has entered into a recession and the central bank has lowered short-term interest...
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Niclas Meyer replied to Robert Richards
Hi @RobertRichards, this is true. As Ben Bernanke points out in his book (Bernanke, 2013, p. 9), the two main tasks of a central bank are to promote "macroeconomic stability" (promote stable economic growth, and keep inflation low and stable) and to "maintain financial stability" (fight and prevent financial crises).
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Niclas Meyer replied to Juho Iivanainen
Hi @JuhoIivanainen, one can probably only speculate on the answer to this question. To illustrate this, the Japan central bank (BOJ) has been buying Japanese government bonds for decades and has been expanding its balance sheet (as % of GDP) especially since the financial crisis. In 2019, it held some 43 percent of outstanding Japanese government bonds...
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Hi @JustinSavage, I do not entirely agree with your statement. The Covid-19 pandemic resulted in a crash in the stock market with daily drops (%) paralleling the worst in history for the S&P 500 index. Also, declines in GDP growth rates around the world (i.e., decline in the real economy), and rises in unemployment rates, have been significant.
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Hi @LesbiaGerciliaMartínezValladares, what the CAPM says is that stocks which historically have had a low correlation (when moving from +1 to -1) with the market have a lower beta. This implies that these low-beta stocks are not too sensitive to market downturns, that is, they perform better than high-beta stocks during for example recessions. Investors should...
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Niclas Meyer replied to Marsel MUdarisov
To continue on this thought, I think the Fed (U.S. central bank) gives a very good answer on why they aim for 2% a year inflation here:
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Niclas Meyer replied to Melissa Price
Hi @MelissaPrice, we will discuss inflation more in-depth during Week 6 (see, for example, Video 6.10). But, simply put, inflation is a general increase in the price level of goods and services which results in a decline in the purchasing power of a currency.
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Niclas Meyer replied to John C.
Hi @JohnC., good question. Here we are discounting using the interest rate (basically the risk-free rate which can be observed in the market and which matches the frequency of the payments). That is, if you receive a (certain) cash flow in one year, the appropriate discount rate would be a one year (risk-free) interest rate.
But if you are valuing stocks,...
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Niclas Meyer replied to Marsel MUdarisov
Hi @MarselMUdarisov, this is a good question, which an economist could perhaps give a better answer to than a financial economist. I think this is because central banks do not want too much inflation, as it erodes the purchasing power of a currency too fast, and they do not want "too little" inflation (or deflation in the worst case) as it puts debtholders...
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Niclas Meyer replied to Hannah Nguyen
Hi @HannahNguyen, like Björn puts it, it is doubtful that compound interest is more powerful than for example gravity. If Einstein really did say this, he was certainly exaggerating a bit. But for an investor investing in the long run, compound interest can play a key role. I think Warren Buffett's success over the past 60 years is a good example of this.
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Hi @ShinajThottipparambil, a valid question which I do not have a specific answer to. When countries were on the gold standard, the value of their currencies were fixed to gold. Then they needed to keep gold in their vaults. However, this is obviously not the case anymore as most countries have fiat currencies.
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Niclas Meyer replied to peter Inegbedion
Hi @peterInegbedion, most financial economists would probably agree on markets being semi-strong form efficient, i.e., that prices reflect all publicly available information (some might argue that it is "always" efficient, while others may argue that this is not the case). Attaining information over and beyond this level may be possible for some investors, but...
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Hi @VilleWideman, Ray Dalio's video is certainly a very interesting take on how the "economic machine works". I also think Ray Dalio's book "Principles", and his and Bridgewater's research texts in general, are worth reading.
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Niclas Meyer replied to Mary Atieno Ojoo
Hi @MaryAtienoOjoo, there are many reasons for why sellers and buyers of the same stock can simultaneously exist. For instance, (1) depending on an investor's age, wealth, risk preferences, etc., some investors may want to sell their stock at a particular point in time while others may want to buy (e.g., to reduce/increase risk exposure), (2) the seller may...
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Hi @EeroKaipiainen, see the step "The future of wealth management" in Week 7 if your interested in hearing Björn's thoughts on these issues.
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Hi @AndrewWalker, in the step "The future of wealth management" in Week 7, Björn shares his thoughts on how he thinks FinTech may transform financial markets and the finance profession in the future.
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Niclas Meyer replied to peter Inegbedion
Hi @peterInegbedion, and how will you know whether you have been skillful, or just plain lucky?
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Hi @SamiTimonen, Buffett certainly has made the bulk of his money by investing in stocks. However, the profits of Berkshire Hathaway are not always invested directly into stocks. For example, according to Berkshire's Q3 2020 report, the company held roughly 119 billion dollars in short term bonds (U.S. Treasury Bills) while holding roughly 245 billion dollars...
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Hi @JoshuaKashitala, was there something specific that you had difficulties with conceptualizing? If so, I can try my best to explain.
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Hi @RuiDanielGomes, a diversified portfolio (different markets, asset classes, etc.) indeed helps to some degree to protect against an unpredictable future. When you invest only in a single stock, stocks in a single industry, a single commodity (let us say gold), a single country's bonds, etc., you are basically making a systematic bet on the (positive) future of...
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Hi @LesbiaGerciliaMartínezValladares, the future value of an annuity formula works so that it assumes that payments are made at the end of each period. But here we also make at the payment at the beginning of first year (i.e., today, at time 0). In addition, this payment is different than the rest of the payments (5,000 vs. 1,200 euros). Thus, we must use the...
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Hi @ToniNikkanen, I agree with your notion that the extremely low bond yields of today's world are maybe not enough to compensate for their risk.
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Hi @ToniNikkanen, the price of the car would most likely go up as inflation is not negative? I guess that if you could borrow at a negative interest rate to buy a car (which you can't), then you could "earn" some money ("interest") by borrowing a lot to buy the car. On the other hand, paying a lot for the car would most certainly mean that you lose money over...
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Hi @MarselMUdarisov, this is indeed what happens when inflation is too high in a country. Since money loses purchasing power too fast, it is not a good storehold of wealth. The extreme example of this would be something like the Weimer-republic in the 1920s.
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Hi Margaret, when referred to the "risk-free rate", one basically refers to the investment which carries the lowest risk (in a given currency). For US dollars, these are US Treasury bills (short-term bonds). If the maturity is short, there is very low risk that the US government will default on this debt (they can even "print" money if needed).
Some may...
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Hi Rukaiya, stocks are riskier than e.g., bonds in the sense that while a bond is a loan to a company, stocks represent an ownership stake in the company. If the company goes bankrupt, debtholders typically receive their money first and shareholders last (if there's anything left). There is also more uncertainty about the returns to shareholders as interest...
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Niclas Meyer replied to S C
Hi S C, if you want to learn more about the history of finance, the Goetzmann (2017) reference is a good starting point.
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Niclas Meyer replied to Chris D
@ChrisD Hi Chris, the reference is to a seminal paper by Nobel Laureate Eugene Fama on market efficiency. The paper discusses the different forms of efficiency (weak, semi-strong, and strong form, respectively). Market efficiency is a very broad research field in finance and there exists a vast amount of empirical (and theoretical) studies covering newer and...
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@AdrianRobertWalmsley Hi, if I understand you correctly, you are asking whether markets are efficient during market crashes? It probably depends on who you ask, but Björn's thoughts on this are that they not always fully efficient during crashes. As he describes it, when liquidity dries up, it is possible that this leads to mispricings in markets. See Video...
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Niclas Meyer replied to Chris D
@ChrisD The 60 (stocks)-40 (bonds) portfolio was used here as an illustrative example, as it has traditionally been considered a "diversified portfolio". However, the current market environment with extremely low bond yields has most likely changed that. Listen to Björn's thoughts on this in the video 3.11 More on diversification (2:50 ->).
Note also that...
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Hi Adrian, one answer is that market prices reflect (consensus) expectations about the future, but, the future is by definition unpredictable. So if the future does not turn out as expected, the stock market will correct accordingly. For example, in 2019, markets were certainly not pricing in a recession in 2020 caused by a pandemic (as it was not known to...
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Niclas Meyer replied to Tero N
Hi Tero! Well, basically, you could say that the view of financial economists is that there is no such thing as a "free lunch" in competitive markets. That is, return is a compensation for taking on risk and there should "lie no 100 dollar bills on the street". However, diversifying is a "free lunch" in the sense that it allows an investor to reduce one's risk...
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Niclas Meyer replied to Chris D
Hi Chris, it is true that the low interest rates for e.g., US Treasury bonds and German Bunds, and the potentially diminished upside for bonds during a recession, may have changed the correlation between stocks and bonds. However, there are other additional asset classes which can be used to build a diversified portfolio. Also, not all bonds have extremely low...
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Hi Tuija, the focus in this video is on the financial crisis in 2008. The financial crisis is considered the closest we have come to a "Great Depression" in the past century. It was a significant event, and threatened to collapse the whole financial system. Also, it was the first time since the 1930s (i.e., the Great Depression) when interest rates went to...
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Hi Aziza, the main difference between a synthetic and a non-synthetic (or physical) fund/ETF is that the non-synthetic fund invests directly in the underlying securities of the index while the synthetic fund tries to replicate the performance of the index using derivatives. For example, a physical stock market ETF invests directly in the stocks included in the...
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Hi Bowen, in many ways, the evidence points towards this conclusion. Or at least you should be aware of the cost structure of the fund, and why the fund is charging extra fees.
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Niclas Meyer replied to Rob L
Hi Rob, we decided not to present the "future value of an annuity" formula in the course material, but we might do it in the future (now that we know that there is a demand for it).
Note that the the formula can be found in the "Calculations, formulas, and solutions for this exercise" PDF, which is available for downloading. I updated the PDF so that the...
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@NnaemekaEzeanowi Hi Nnaemeka, past performance has in fact not (!) been shown to have predictive power about a fund's future performance. So, for example, choosing funds based on their historical performance or based on Morningstar Ratings (a star-based ranking system (1-5 stars), which indicates the past performance of a fund) will not help you find future...
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@BowenYu Hi Bowen, it is stated in the fund's prospectus. Sometimes it is mentioned also in the title. Consider e.g., the Vanguard S&P 500 ETF and the Vanguard 500 Index Fund Investor Shares. The former is an ETF, while the latter is a mutual fund. But to be sure, always read the prospectus.
I think I already touched upon this in an earlier comment, but...
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Niclas Meyer replied to Mary Atieno Ojoo
Hi Mary, during Week 6, Björn will explain what is meant by inflation in one of the videos. The short answer is that it is the average rise in prices, which over time results in the loss of purchasing power.
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Hi Anna, this is a good question with no single correct answer. One could argue that it depends on your preferences. With index mutual funds (or ETFs) you can invest for example in the US stock market, the European stock market, the Chinese stock market, etc. Of course, you can also invest in different asset classes. This allows you to diversify by investing...
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Hi Anna, indeed, stocks have historically outperformed bonds and bills measured over longer period of times (usually researchers look at at least 50-100+ years). This is known as the equity risk premium. Thus, if you have a long enough time horizon, investing a larger part in risky assets such as stocks should on average yield higher returns than investing in...
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Niclas Meyer replied to R. Brackenbury
Hello! Gold has indeed been a "safe haven" for investors during economic turbulent times (and, historically, also during wars, etc.), but also when there has been a devaluing of a major country's currency. Although gold as such does not produce anything, it's allure may partly be that it cannot be produced by for example governments - in contrast to fiat...
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Hi A T, we will discuss passive versus active investing in detail during Week 5. Hope you enjoy the course!
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Hi Ravi, it is true that we cannot diversify away systematic risk (thus we should be compensated for bearing this type of risk) but we can diversify away unsystematic risk (thus we should not be compensated for bearing this type of risk).
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Niclas Meyer replied to Andrew Walker
Hi Andrew, it is possible that Einstein may - or may not - have made that statement, but allegedly he did so.
Living in the Germany in the 1920s, he would at least most likely been exposed to the power of hyperinflation and the implications this had on the purchasing power of any salary received in, or savings held in, the Papiermark.
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Hi Kenneth, Treasury bonds (U.S. for dollars, and German Bunds for the euro) are indeed "virtually risk free" investments (although there is a very small probability that one of these governments could default on their debt). Thus, they are the "benchmark" for other investments, and are are used to calculate the "risk-free rate".
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Niclas Meyer replied to Hristo Petev
Hi Hristo, if interest rates go up, it will decrease the value (price) on existing nominal bonds. If the price of a bond goes down, then the yield goes up (not down). For bonds, prices and yields move inversely.
To illustrate this, say you own a nominal bond. If interest rates go up, new bonds will offer a higher yield than your bond, all else equal. Thus,...
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Niclas Meyer replied to Chris D
Hi Chris, it is difficult to predict how deficit spending will affect asset classes in the future.
Simplified, if deficit spending leads to inflationary forces, it will decrease the value of nominal bonds and firms whose businesses are hurt by inflation, but increase the value of inflation-linked bonds, gold (most likely), and firms whose businesses...
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Hi Dieune, well-functioning financial markets can indeed help societies grow. There are of course several other factors that, historically, have helped societies grow such as education, technological developments, trade, military strength, etc.
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Niclas Meyer replied to Robert Richards
Hi Robert, it is indeed important to not put all of your eggs in one basket (read: put all your money into a single asset) but one also needs to consider the correlations between the different baskets of eggs (read: correlations between assets included in your portfolio). Simply put, you attain more diversification benefits when correlations move towards...
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Niclas Meyer replied to Robert Richards
Hi Tom! Systematic and unsystematic risk relates to diversification. You cannot diversify away systematic risk such as being exposed to the risks of a recession, but you can diversify away unsystematic risk such as company-specific risk. A diversified portfolio contains a very low amount of, or no, unsystematic risk, but contains systematic risk. Even a...
